New York's one-man scourge of Wall Street

In the early weeks of 2001, when Eliot Spitzer first began investigating corruption on Wall Street, most Main Street investors still believed Internet stocks could make them rich, and the names Enron and ImClone might as well have been monsters from a sci-fi flick.

Since then, of course, each has become a buzzword for the financial house of cards the country's seen topple in the past two years, and Mr. Spitzer, the Democratic attorney general of New York, has emerged as the foremost scourge of Wall Street power brokers. Armed with a devastating array of evidence from his investigations, he's uncovered widespread fraud by stock analysts, illegal trading, and an ocean of conflict of interest in a realm that had been celebrated during the 1990s' bull market as the Great American Money Machine.

Nor is Wall Street a big enough target for a state attorney general who has gained more national visibility than most governors. He has also gone up against power plants, health-maintenance organizations, and Microsoft Corp.

Spitzer's successes have made him something of a folk hero, not only to the thousands of small investors who saw their 401(k) savings vaporize after the Internet bubble burst, but also to a public grown increasingly cynical after stories of corporate malfeasance continue to bombard the news. Indeed, as national headlines trumpet Spitzer as "Crusader of the Year" or "Sheriff of Wall Street," he has come to be seen as a rising political star.

"He's one of the few attorneys general who make people wonder whether this person may be presidential timber down the road," says Lee Miringoff, director of the Marist College Institute for Public Opinion. For now, most expect Spitzer to run for governor of New York in 2006. "The chatter around the capitol corridors is that that's likely to be his next move."

Spitzer, of course, is coy about such notions. Yet in many ways, his rise has followed a classic populist template in American politics. During times of scandal and corruption, an earnest political neophyte, replete with passionate ideals, takes on established interests and captures the adoration of a public feeling powerless. Yet, for every Mr. Smith going to Washington, there's also a Willie Stark, and the battle against corruption often mingles with shrewd calculation and vaunting personal ambition.

Though he grew up in a well-to-do home in the Bronx, went to Princeton and Harvard Law School, he can look the part of a populist scourge. With a balding pate, sharp elbows, and a slight forward lean, he has the gangling and loping gait of a dairy farmer rather than a Manhattan attorney. When he sits with a pensive frown, his jug-handle ears, jutting chin, and five-o'clock shadow can make him look like the classic hobo clown. Yet when he furrows his eyebrows and directs his fierce blue eyes, he can have the angular expression of a bird of prey. Still, his atypical good looks led New York Magazine to dub him one of the 50 sexiest New Yorkers.

From the time Spitzer first took the attorney general's seat in 1999 - it was his first elected office, won after a bruising electoral battle and weeks of recounts - he has carefully crafted an image as "the people's lawyer." His tenure has been characterized by other bold, sweeping initiatives: He sued Midwest power plants for their pollution wafting into New York, took on gunmakers that supplied retailers conducting illegal cross-state sales, and won millions of dollars in back pay for subminimum wage workers at fruit markets. And while his media savvy has invited its own share of cynics, even some of his foes can admire his Wall Street exploits.

"It was like hitting a political goldmine," says Mike Paul, a former communications official in the administration of Mayor Rudolph Giuliani. "My overall opinion of Spitzer, even as someone working as a Republican in past positions, is this guy's got great positioning right now. And it's not based on spin, it's based on hard work, by hiring people into various divisions ... that have an expertise."

His first investigation of Merrill Lynch has already become legendary. Suspicious about the endless "buy" ratings its analysts were giving during the Internet boom, especially for companies that used Merrill for their investment banking, Spitzer's office subpoenaed over 94,400 pages of their office e-mail. Going through each page by page for weeks, they discovered a pattern in which analysts did not really believe the high ratings they were giving certain stocks, but were pumping them up since the Merrill banking divisions had a financial stake in them.

From this first sweep through 30 boxes of e-mails, Spitzer's office has almost single-handedly forced Wall Street firms to change the way they work. At his prompting, other states, as well as the Securities and Exchange Commission (SEC), began investigating other firms, and the process finally culminated in a "global settlement" in December 2002, in which 12 investment houses agreed to pay $1.4 billion in fines.

Just this month, Spitzer also brought charges against the hedge fund Canary Capital Partners, accusing it of "late trading" mutual funds with Bank One, Bank of America, and two other firms. He likened late trading, an illegal practice, to "betting today on yesterday's horse races."

All of this, say many market watchers, has been extremely embarrassing to the SEC, the federal agency charged with regulating the financial industry. So why was it Spitzer, and not federal regulators, to lay bare the backroom connivings?

"He has the threat of criminal prosecution, which the SEC does not have," says Richard Sauer, a former assistant director with the Division of Enforcement at the SEC. "And that can make a tremendous difference in the willingness of witness to cooperate. White-collar people are terrified of going to jail. They sometimes look at fines and injunctions as a cost of doing business. But the idea of having your kids no longer going to private school, and visiting you behind bars, will elicit amazing amounts of cooperation."

Yet, instead of lining up CEOs in a perp walk parade, Spitzer has tried instead to change Wall Street's business practices, and not simply send people to jail. In the global settlement, none of the investment firms were forced to admit guilt - though the evidence made public by Spitzer's office had already done much damage.

This approach reflects Spitzer's view of law enforcement as a tool for structural change as well as punishing wrongdoers. "The law is a dynamic entity," he says in a Monitor interview. It "is designed to evolve over time and reflect changing economic realities, and changing social values."

This Midrashic style of thinking, as well as his relentlessness, was shaped when he was growing up as the youngest of three in a well-to-do Jewish home. Though young Eliot was very athletic - a tennis captain and defensive "enforcer" in soccer - his parents emphasized the rigors of thinking.

By the time he was a sophomore at Princeton, and used to spending his summers as an intern on Capitol Hill, Spitzer decided he needed "life experience," and headed South to work as a day laborer, first in New Orleans, and later in Atlanta. Arriving at dawn at the agencies, he'd spend days stacking fiberglass insulation in a sweltering warehouse, working with a jackhammer, or digging down to a stuffed sewer line in the kitchen of a Holiday Inn.

Today, with his accomplishments as attorney general, new experiences await. "My view has been, if I do this job well, then there will be other opportunities, who knows of what sort. Obviously, everybody is saying, 'Are you running for governor?' I've said, I'll think about it.